India: Is the ‘urgent crypto ban’ killing the ‘Digital India’ dream?

2019-04-30

Cryptocurrency is still in its nascent stage and its growing community is working relentlessly towards wider adoption across the globe. While many nations are taking the initiative to understand the tech behind crypto and form regulations with the view of adopting it, India might be planning to completely ban it.

On March 29, the Supreme Court of India adjourned the ‘Crypto vs RBI’ case within minutes, on the request of the Indian government. The Indian crypto community was left disappointed as many were eagerly awaiting clarity on the government’s stance on crypto, with some even expecting the possible shedding of the ‘illegal’ tag. The SC pushed the hearing to July 2019, following the general election, when the new government would be in power.

A month following the hearing, there are now rumors about the government’s decision to impose a complete ban on cryptocurrencies under the Prevention of Money Laundering Act [PMLA]. Another reason cited by the authorities in putting an end to crypto in India was the defrauding of investors by Ponzi schemes.

MONEY LAUNDERING

Money laundering is an age-old concept, with several cases of people cheating the system already in existence. The case of Vijay Mallya, a prominent businessman is a prime example of money laundering. Mallya, who has now sought shelter in the UK, owes Rs 9,000 crore to various Indian banks, but escaped the wrath of the law until recently. He is currently being heard by a court in the UK on an extradition request filed by India.

Another example is Nirav Modi, a businessman currently wanted by the Interpol for criminal conspiracy and his involvement in the Punjab National Bank case wherein he is accused of perpetrating a $1.8 billion fraud. Despite several cases of money laundering coming into the light every day, no one has ever talked about banning money as a preventive measure to pacify the risk of laundering money.

Cryptocurrencies have a history of being wildly misunderstood, being labeled as ‘money-making schemes’ or ‘Ponzi schemes’ by many. India has a long history with stock market scams, with the Harshad Mehta scam being the most infamous one. What is often forgotten, however, is the fact that after the scam, several regulations were put in place to check the stock market, instead of imposing a ban on investments or the entire stock market altogether.

Cryptocurrencies operating on blockchain technology could help people by reducing the remittance levied on cross-border payments. Apart from its benefit to citizens, cryptocurrencies provide privacy, while blockchain provides transparency and it is possible for users to provide their identities on any blockchain network by integrating smart contracts.

STAGES OF MONEY LAUNDERING

Money laundering is possible with cash and even cryptocurrency. With cryptocurrency, however, every attempt to move this money is traceable and visible. There are three stages to laundering money:

1. Placement

The black money enters formal or informal financial institutions via hard cash and as a one-time payment or investment, following which there is no trace of this money. With crypto, however, there is not only a record of money entering the crypto market, but also what happens to these cryptos thereafter.

2. Layering

After the money enters the system, the culprit generally engages in a series of conversions or simply moves the funds away from its source. However, as discussed before, every transaction on a blockchain can be traced and is immutable. Thus, any amount of transfers within the system can be traced back to the source, thus providing a means for the government to monitor the activities.

3. Integration

The final step of converting this money into ‘white’ is to put it back into the legitimate economy by means of investments in a company or the purchase of real estate or any luxury goods. With crypto, the introduction of money in the economy requires conversion into hard cash and conversion of a hefty amount will not go unnoticed, even in cryptocurrencies.

Additionally, any transaction on a blockchain needs authorization, which in itself requires 51% of the nodes in the blockchain’s network to achieve. Any changes in this record would not only be ineffective, but can also be traced in an audit. The only difficult part of this tech is that anything running a blockchain platform will require a considerable amount of decentralized and distributed nodes to be completely secure.

TERRORISM

Apart from money laundering, the other concern that ails the government is the use of cryptocurrencies in funding terrorism. India has been a constant target of terrorists and terrorism. However, to say that a ban on cryptocurrencies will prevent the facilitation of terrorism is equivalent to saying that banning television will help in preventing eyesight problems. It just doesn’t add up.

Secondly, it is a tedious task to operate from a remote location and have a set up in place for the terrorists to use cryptocurrencies for funding their activities. On the contrary, liquid cash acts as a better alternative to carry out untraceable activities and exchange hands for goods.

Recent reports suggest that Hamas’s armed wing, Izz el-Deen al-Qassam Brigades has been receiving funding in Bitcoin via donations. It is possible for anyone to carry out cryptocurrency transactions through OTC trading, whether it is banned in a country or not. There is no way the government will know about these trades. However, if regulations governing cryptocurrencies are implemented, people will be legally obligated to register with their identities, which will not be disclosed to the general public, but can be used by the government to track a flagged transaction. The exchanges can work with the government for figuring out the person behind an address and the citizens can carry out crypto transactions while maintaining transparency in the system.

Conversely, the lack of regulations could lead to a rise in illegal trading, posing an even bigger threat in all probability.

TAXATION

America has a tax system in place for crypto earnings. Similarly, many other nations are working around policies for taxation on digital assets as well; efforts India can take inspiration from. India’s Income Tax Department had previously sent a notice in 2018 to several people, asking them to declare their earnings in Bitcoin [cryptocurrencies]. There was even a discussion on levying nearly 18% tax on crypto earnings under GST [Goods and Services Tax]. If India re-considers its ban, the indirect tax system in place, GST, could be resorted to with amendments.

GROWING CRYPTO COMMUNITY AND THE IDEA OF ‘DIGITAL INDIA’

India has a growing crypto community that is heavily involved in spreading awareness about cryptocurrencies and blockchain technology. The country’s various exchanges have noted a rise in crypto transactions over time, indicating a growing interest among citizens. Even banks have shown a keen interest in adopting blockchain technology and joined hands with Ripple, a real-time gross settlement system, currency exchange, and remittance network to benefit from its technology for cross-border remittances.

India’s current government has also been promoting the idea of ‘Digital India’ in every walk of life, even money. Online payments in the country are on the rise, with telecom industries providing cheap schemes for people to connect to the internet. Giving a boost to cryptocurrencies aligns with the idea of ‘Digital India’ and a positive approach towards it can provide citizens with an alternative to money.

Imposing a ban on certain goods and services in India is nothing new for its citizens [PubG, Tik Tok, etc.]. However, what is required at this hour is a careful review of growing technologies and their prospective benefits for Indian citizens. The effort to curb money laundering has no sure-shot solutions. However, with blockchain technology and the wider use of cryptocurrencies, the government can devise a strong monitoring system to keep a check on it.